Upcoming challenges for asset management

Funds People (29.04.2019) - Nicolas Faller, co-CEO and Head of Institutional Clients at UBP, discusses the industry's challenges for the coming years, such as trends in SRI investment, the absolute return offering and re-evaluating pricing structures.

In recent months, SRI products have been the focus of attention, in both asset management and ETFs. The growth of SRI is unstoppable, but distinctions also have to be made. We are witnessing a real revolution in impact investing.

I am referring to a particular branch of SRI which focuses on measuring and demonstrating the real effect of investments on people and on society. There are companies that will benefit from the change in the global mindset and funds that will know how to pick out the gems that are racing ahead of other companies. At present it is a niche market that is receiving attention from private investors, but soon regulation will bring it into sharper focus for investment advisers. It will become common practice.

In any case this will be in the future because to date assets are not flowing into the waiting arms of asset managers. This is a crucial challenge for the entire industry and all market players have a role to play in the coming years. So far there has been a lot of confusion between SRI, impact investing and ESG criteria, and investors have not yet seen the benefits of this investment strategy.

But I remain optimistic because SRI is not only about feeling good when investing, it’s a way of buying into companies positioned on the crest of the wave, those that demonstrate the biggest growth potential for the coming years. They are looking at double-digit growth simply because there is going to be so much demand.

Liquid alternatives

Unlike in SRI, there is an area with high demand but few attractive opportunities: absolute return strategies. One of the big concerns is how to get attractive returns on cash, given the fact that bond yields will remain low as long as central banks worldwide continue to maintain an accommodative monetary policy.

Absolute return funds have been the industry’s answer to this demand, but they have proved disappointing in difficult market conditions. There are two reasons for this. Firstly, there is the problem of critical size. Above a certain amount of assets under management, extracting value from the underlying strategies becomes difficult. For many asset managers, the only solution has been to adopt a directional strategy. Others have failed to deliver the expected asymmetry and suffered when the markets changed direction.

Our teams stood firm with their investment process and it worked. That is one of the lessons from 2018. UBP really sees strong potential in absolute-return funds provided their size is limited to keep them agile. Specifically, we see space for fixed income growth, as there are some attractive ideas in high-yield and emerging market debt. In equities, we favour a market-neutral position.

Pricing structure

Another hot topic is the surge in index funds, spurred by ample liquidity in the market and by the weak management of many supposedly active investment vehicles. In this respect, we contend that the world is big enough to contain both passive and active management, but the main challenge for the asset management industry will be reassessing the pricing structure both in active and passive management in relation to expected returns.

Indeed, expectations on returns must be dramatically reviewed. According to a recent McKinsey study, 15 years from now an investor might expect an estimated annualised return of 4–5% for equities and 1% for fixed income. In a traditional balanced portfolio this would bring the average return to around 3%. Fees therefore cannot continue to be charged at the same level.

It is a fast-changing landscape where investment managers do not hold all the cards. Part of the job of a distributor must be to educate clients about the return they can expect. To begin with, because the baseline for return on investment is low, compounded by weak growth, zero interest rates and non-existent inflation. An annualised return of 3–4% is not bad. And I think there are some people who keep over-promising.

Sphere (01.2020) - At the end of June 2019, UBP's assets under management had almost risen back to the level they reached in 2007, before the financial crisis caused them to fall to CHF 65 billion by the end of 2010. Since then, UBP has doubled in size and laid the foundations for further growth.